Saturday, August 16, 2008

Not done yet

Recently I wrote about globalization's critics cheering on high oil prices in hopes that they will reduce trade levels. According to recent research, however, it seems like oil prices wont have that large an effect. Writing in Vox, the authors argue:
"Our evidence suggests that the determinants that matter most for explaining trade costs are standard factors like geographic distance (which is a rough proxy for information and transportation costs), trade policy and tariffs, adherence to fixed exchange rate regimes, and membership in the British Empire or Commonwealth... Anderson and van Wincoop (2004) find that the tariff equivalent of international trade costs is about 74%. Transport costs only make up a third of these trade costs. The rest consists of border-related costs such as informational barriers, tariffs and red tape. Even if oil prices directly feed through to transport costs, the impact on overall trade costs is limited."
However, the authors also note that higher fuel costs may affect large supply chains. As a result, there may be a decline in the "back and forth" trade of bulky items that are assembled partially in one country and partially in another. For example, IKEA just opened their first factory in the US.

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